Today the Supreme Court issued a new decision in the ongoing saga of student loan debt. United States Aid Funds, Inc. v. Espinosa. The background facts are as follows.

Debtor Espinosa confirmed a Chapter 13 plan which included language specifically stating that the principal would remain due and owing on the student loan debt, however, interest would be discharged upon payment of the principal. In effect, Espinosa modified his loan to be a 0% interest loan. The plan was confirmed by the Court as no one objected. Subsequently, the debtor’s case discharged successfully. A few years later, United States Aid Funds attempted to collect on the unpaid interest. The debtor sought an order from the court enforcing the confirmation order. United States Aid objected stating that the confirmation order violated United’s due process right. United also filed a cross motion to set aside the confirmation order. The Bankruptcy Court denied their motion and enforced the confirmation order. United appealed to the District Court which overturned the decision of the bankruptcy court. Espinosa appealed to the Ninth Circuit which reversed again holding that the confirmation was mere ‘legal’ error and did not arise to the standard needed to set aside the confirmation order. United then appealed to the Supreme Court.

Student loans are non dischargeable in bankruptcy. This is a result of a 1998 modification to the bankruptcy code. Over time, Bankruptcy Courts have established a three part test, called the Brunner Test, to determine if a student loan creates an undue hardship on the debtor. If the answer to the test is yes, then then student loan is discharged. The standard of ‘undue hardship’ is exceedingly high and is rarely granted.

To begin the discharge process, the debtor must file an adversary proceeding to determine dischargeability. Then the student loan company has the opportunity to respond. If there is no response, the debtor may or may not be granted a ‘default’ judgment.

In the present case, the debtor failed to initiate an adversary proceeding. United argued that this was a failure of procedure and the Court erred by confirming the plan without having advised the debtor to initiate the adversary proceeding. The Supreme Court disagreed and held that the confirmation order was a final order of the Court and United had notice of the confirmation order. They could have appealed the order within the appropriate time frame, however, they did not. Their failure to enforce their rights with the confirmation order essentially ‘waived’ their right to object to the terms of the plan.

The confirmation order is a self executing order. However, notice of the order is still provided and at no time was United not aware of what was going on in the case. The fact that they chose to ignore it is what ultimately did United in.

The Espinosa case does a lot for Mr. Espinosa in that it removes the interest they owe on the student loan, but for the rest of us, we still know the procedure is to file an adversary proceeding to determine dischargeability. The Court makes reference to this requirement in their ruling. It is likely that the Court would point this fact out to us, as debtor’s attorneys, at the confirmation hearing. But, if the Court did not, and the student loan company did not object to the terms of the confirmed plan, there is now a colorable argument to say that the terms of the plan control.

A more subtle point is that this is another great case to underscore the fact that the terms of the plan control after confirmation. The bankruptcy code provides a framework to object to a confirmed plan and that framework should be utilized by creditors and debtors alike. A party’s failure to pay attention to the proceedings can result in them being held to the terms of the confirmed plan.

Jay S. Jump
Law Offices of Jay S. Jump
528 2nd Avenue South
Kent, WA 98032
(253) 479-0241
www.jumplawgroup.com